Description
FM BETA CALCULATION OF HINDUSTAN ZINC
INTRODUCTION
Vedanta Resources1 is a London-based FTSE 100 metals and mining group, diversified in operations and inclusive in scope. They currently operate in India, Zambia and Australia, with extensive interests in aluminium, copper, zinc and lead. They employ over 30,000 people in their various locations. In December 2003, they proudly became the first Indian company to be listed on the London Stock Exchange. They have undertaken several greenfield and brownfield expansion projects in a number of locations in order to achieve this goal. The capital expansions completed in the first phase involved fairly complex project technologies, and an investment of $2.2 billion. They completed these expansions in record time, at costs significantly lotheyr than international benchmarks, and now, the next phase of the expansion pipeline is currently underway
VEDANTA RESOURCES
Vedanta Resources plc
Vedanta Resources plc is a diversified metals and mining company with revenues in excess of US$6 billion. They are proud to be the first Indian manufacturing company to be listed on the London Stock Exchange.
1
www.vedantaresources.com
Their experienced workforce of over 30,000 people is distributed among their operating locations in India, Zambia and Australia. The principal members of their consolidated group of companies are as follows:
COPPER BUSINESS
Sterlite Industries (India) Ltd. Sterlite is headquartered in Mumbai. Sterlite has been a public listed company in India since 1988, and its equity shares are listed and traded on the NSE and the BSE, and are also listed and traded on the NYSE in the form of ADSs. Vedanta owns 53.9% of Sterlite and have management control of the company. Konkola Copper Mines. They own 79.4% of KCM’s share capital and have management control of the company. KCM’s other shareholder is ZCCM Investment Holdings Plc. The Government of Zambia has a controlling stake in ZCCM Investment Holdings Plc.
Copper Mines of Tasmania Pty Ltd. CMT is headquartered in Queenstown, Tasmania. Sterlite owns 100.0% of CMT and has management control of the company.
ZINC BUSINESS
Hindustan Zinc Limited. HZL is headquartered in Udaipur in the State of Rajasthan. HZL’s equity shares are listed and traded on the NSE and BSE. Sterlite owns 64.9% of the share capital in HZL and has management control. Sterlite has a call option to acquire the Government of India’s remaining ownership interest.
ALUMINIUM BUSINESS
Bharat Aluminium Company Ltd. BALCO is headquartered at Korba in the State of Chhattisgarh. Sterlite owns 51.0% of the share capital of BALCO and has management control of the company. The Government of India owns the remaining 49.0%. Sterlite exercised an option to acquire the Government of India’s remaining ownership interest in BALCO in March 2004.
Vedanta Aluminium Ltd. Vedanta Aluminium is headquartered in Lanjigarh, State of Orissa. Vedanta owns 70.5% of the share capital of Vedanta Aluminium and Sterlite owns the remaining 29.5% share capital of Vedanta Aluminium.
IRON ORE BUSINESS
Sesa Goa Limited. Sesa Goa is headquartered in Panaji, India, and its equity shares are listed and traded on the NSE and BSE. They own 57.1% of Sesa and have management control of the company.
COMMERCIAL POTHEYR GENERATION BUSINESS
Sterlite Energy Limited. Sterlite Energy is headquartered in Mumbai. Sterlite owns 100.0% of Sterlite Energy and has management control of the company. Madras Aluminium Company Ltd. MALCO is headquartered in Mettur, India. MALCO’s equity shares are listed and traded on the NSE and BSE. They own 93.9% of MALCO’s share capital and have management control of the company.
Operations ? COPPER
Their copper business is comprised of operations in India, Zambia and Australia. Their Indian copper business is principally one of custom smelting and is operated by Sterlite, while their Zambian copper business is owned and operated by KCM. They own 54% of the share capital of Sterlite and 79.4% of the share capital of KCM. Sterlite was India’s largest metals and mining company based on net sales in fiscal 2008. In addition, they own the Mt. Lyell copper mine in Tasmania, Australia, which provides a small percentage of Sterlite’s copper concentrate requirements. Their Zambian operations are comprised of ftheir mines, one at Konkola, two at Nchanga and one at Nampundthey, a tailings leach plant at Nchanga and a smelter at Nkana. Their copper cathode production increased from 436,000 tonnes in fiscal 2006 to 507,000 tonnes in fiscal 2010. The production increases, together with higher copper market prices, drove revenue of their copper business from $2,241.3 million in fiscal 2006 to $3,812.2.0 million in fiscal 2010. The mid-shaft loading station at the Konkola Deep Mine Project was commissioned in March 2010 as scheduled. Construction work on the bottom shaft sinking is progressing theyll for completion by end 2011. The cost of KDMP project has been revised upward from US$674 million to US$973 million due to theyak ground conditions, increase in scope post detail engineering and consequent extra time required, and commodity price increase.
? ZINC
Their fully integrated zinc business is owned and operated by HZL, India’s leading zinc producer with a 79.7% market share by volume of the Indian zinc market in fiscal 2008, according to the Indian Lead Zinc Development Association. HZL is the world's largest
integrated zinc lead producer with current capacity of 964,000 tonnes. Sterlite owns 64.9% of the share capital of HZL. HZL’s operations include three lead-zinc mines, three hydrometallurgical zinc smelters, one lead smelter and one lead-zinc smelter in Norththeyst India and one hydrometallurgical zinc smelter in Southeast India. HZL’s zinc production increased from 284,000 tonnes in fiscal 2006 to 578,000 tonnes in fiscal 2010, representing a CAGR of 19.4%. The production increases, together with higher zinc market prices, drove revenue of their zinc business from $875.5 million in fiscal 2006 to $1,651.7 million in fiscal 2010, representing a CAGR of 17.2%. HZL achieved the 1mtpa zinc-lead capacity through the recent commissioning of the 210,000 tonnes zinc smelter in Rajpura Dariba. The 100,000 tonnes lead smelter and the associated 160 MW captive potheyr plant is progressing theyll and on schedule for completion by Q2FY2011 HZL expects to increase its silver production from the current levels of approximately 100120 tonnes per year to a level of approximately 500 tonnes per year in the form of silver and silver bearing residue. A large part of this increase would be from the Sindesar Khurd mine where silver occurrences are approximately at levels of 200 ppm and from the use of appropriate technology in the new smelters. The ongoing exploration activities at HZL has yielded significant success with an increase of 33.7 million tonnes gross reserves and restheirces, prior to depletion of 7.1 mtpa in FY2010. Total reserves and restheirces as at 31 March 2010 stand at 298.6 million tonnes containing 34.1 million tonnes of zinc and lead metal and 832.7 million ounces of silver.
HINDUSTAN ZINC LTD.2
Overview of the Company
They are India's largest and world's second largest integrated producer of zinc & lead, with a global share of approximately 6.0% in zinc. They are one of the lotheyst cost producers in the world and are theyll placed to serve the growing demand of Asian countries. Hindustan Zinc is a subsidiary of the NYSE listed - Sterlite Industries (India) Limited (NYSE: SLT) and London listed FTSE 100 diversified metals and mining major - Vedanta Resourrces plc. Their core business comprises of mining and smelting of zinc and lead along with captive pothey generation. They have their mines and their smelting operations: mines are situated at Rampura Agucha (largest zinc producing mine in the world), Sindesar Khurd, Rajpura , Dariba and Zawar in the State of Rajasthan; while the smelters are located at Chanderiya, Debari and Dariba in the State of Rajasthan and Vizag in the State of Andhra Pradesh. In March 2010, they have successfully commissioned their 210 ktpa Hydro Zinc Smelter at Dariba Smelting Complex and 1 mtpa concentrator at Rampura Agucha, in the state of Rajasthan. Their current metal production capacity is 964,000 tonnes per annum (879,000 tonnes of zinc and 85,000 tonnes of lead). The ore production capacity stands at 8.60 million tonnes per annum. They also own 314 MW of coal based thermal captive potheyr plants in Rajasthan to support their metallurgical operations. As a green energy initiative, they also have 123.2 MW of wind energy in Gujarat and Karnataka, which is sold to the respective State grids. Hindustan Zinc Limited (HZL) is an integrated mining and resources producer of zinc, lead, and silver. It is a subsidiary of Vedanta Resources PLC and is the world’s largest fully integrated Zinc producing company, with about 90% production share and around 80% market share in domestic market. It is also India’s leading Lead producer. • One of the world’s lowest cost producers of Zinc and Lead owing to its captive mines and power plants.
2
www.hzlindia.com www.vedantaresources.com
• The company has exclusive mining rights and continuously increasing capacity, making it the only choice for its customer. This, combined with a significant cost advantage, strong sales realization helps HZL post robust growth in revenues. • HZL’s captive mines of zinc and lead ore are located in Rajasthan; with total reserves of 298.6 MT. The average3 Zinc content across mines stands at ~ 8.7%, one of the highest globally. • HZL is focusing aggressively on increasing its silver production. It expects to become Asia’s largest and world’s sixth largest silver-producing company by 2013 • HZL is a debt free company and at the end of FY10 had a net cash balance of Rs. 118bn. Based on the consolidated FY12 EV/EBIDTA multiple of 7.5, the fair value for the company works out to Rs. 1450
3
http://www.fullertonsecurities.co.in/equity/markets/rsch_reports/1_0_15102010Fullerton Hindustan Zinc%20Ltd%2015th%20Oct%202010.pdf
Measuring Market Risk
Changes in interest rates, government spending, monetary policy, oil prices, foreign exchange rates, and other macroeconomic events affect almost all companies and the returns on almost all stocks. We can therefore assess the impact of “macro” news by tracking the rate of return on a market portfolio of all securities. If the market is up on a particular day, then the net impact of macroeconomic changes must be positive. We know the performance of the market reflects only macro events, because firm-specific events—that is, unique risks—average out when we look at the combined performance of thousands of companies and securities. In principle the market portfolio should contain all assets in the world economy— not just stocks, but bonds, foreign securities, real estate, and so on. In practice, however, financial analysts make do with indexes of the stock market, usually the Standard & Poor’s Composite Index (the S&P 500). The task here is to define and measure the risk of individual common stocks. We can probably see where we are headed. Risk depends on exposure to macroeconomic events and can be measured as the sensitivity of a stock’s returns to fluctuations in returns on the market portfolio. This sensitivity is called the stock’s beta. Beta is often written as the Greek letter ?.
Capital Asset Pricing Model (CAPM)
What Does Capital Asset Pricing Model - CAPM 4mean? A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. Expected return on the share E(Rjt) = a constant Rt(1 – ?j) + expected return on market portfolio E(R?t) x beta of the share ?j The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period
4
www.investopedia.com www.wikinvest.com
of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk. This is calculated by taking a risk measure (beta) that compares the returns of the asset to the market over a period of time and to the market premium (Rm-rf). The CAPM says that the expected return of a security or a portfolio equals the rate on a riskfree security plus a risk premium. If this expected return does not meet or beat the required return, then the investment should not be undertaken. The security market line plots the results of the CAPM for all different risks (betas).
Calculating Beta:5
The most important component in calculating the required return to shareholder (from the CAPM) is the company’s beta. The CAPM can be succinctly stated as:
The original model was conceived of theoretically, and was expected to be forward looking. Careful reading of Sharpe’s original work show that the market assesses systematic risk looking at expected future covariance of the company’s returns with that of the overall market. It is assumed that these covariances are unbiased and efficient estimates of the observed relationships ex post facto. Traditionally the CAPM relationship is estimated using simple regression on historical outcomes, where ks is the y variable, and kM-kRF (or the market risk premium) is the only x variable. Care must be taken that the returns plugged into the regression are all for the same period. Calculated stock returns should be annualized if the risk-free rate is an annual rate. The market risk premium is merely the difference between the return to the market portfolio and the risk-free rate. Academics typically use a value weighted portfolio to proxy for the
5
http://www2.cob.ilstu.edu/kjbaue2/fil341/SV.pdf www.investopedia.com
market portfolio, and a one-month Treasury
Bill rate to proxy for the risk-free rate.
Practitioners can use equally weighted portfolios (but not all do) and tend to use longer term Treasury bonds for the risk-free rate. The biggest contention between the two is over the riskfree rate proxy. Academics want a rate that is free from all risk, including interest rate risk. Practitioners want a default-risk-free instrument with a more comparable maturity to stock.
What Does Beta Mean?6
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns..
Expected return = risk-free rate + risk premium
?
Beta is a historical measurement of the risk an investor is exposed to by holding a
particular stock or portfolio as compared to the market as a whole. Aggressive stocks have higher beta(?), betas greater than 1.0, meaning that their returns tend to respond more than one for one to changers in the return of the overall market.
?
?
Defensive stocks have low beta , betas lower than 1.0, The returns of these stocks vary less than one-for-one with market returns. The average beta of all stocks is—no surprises here—1.0 exactly.
6
www.investopedia.com www.investorwords.com
Applications of Beta 7
Beta is a commonly used tool for evaluating the performance of a fund manager. Beta is used in contrast with Alpha to denote which portion of the fund's returns are a result of simply riding swings in the overall market, and which portion of the funds returns are a result of truly outperforming the market in the long term. For example, it is relatively easy for a fund manager to create a fund that would go up twice as much as the S&P 500 when the S&P rose in value, but go down twice as much as the S&P when the S&P's price fell - but such a fund would be considered to have pure Beta, and no alpha. A fund manager who is producing Alpha would have a fund that outperformed the S&P 500 in both good times and bad.
7
www.wikinvest.com
Analysis of Beta calculated of HINDUSTAN ZINC LTD.
The different values found for the year from 2004-2010 are as follows Year Value of Beta BETA 2004-10 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 0.44341417 -0.134622155 0.015060877 0.475006739 0.259225466 1.253444878
0.318491643
Interpretation of Data( ? value) ?
The beta for the year 2004-05 is found to be 0.44341417, it means its a defensive stock having value < 1.0 , which implies that less risk is associated with the stock of the company and thus low returns.
? ?
In the year 2005-06, the value of beta is found to be
-0.134622155, which states 0.015060877,
it means its a
a negative co relation between risk associated with the value of shares and sensex. In the year 2006-07, the value of beta is found to
defensive stock having value < 1.0 , which implies that less risk is associated with the stock of the company and thus low returns.
?
In the year 2007-08, the value of beta is found to be
0.475006739, it means its a
defensive stock having value < 1.0 , which implies that less risk is associated with the stock of the company and thus low returns.
?
In the year 2008-09, the value of beta is found to be
0.259225466, it also means
its a defensive stock having value < 1.0 , which implies that less risk is associated with the stock of the company and thus low returns.
?
But contrary to the above values of beta , in the year 2009-10, the value of beta is found to be greater than 1 i.e. 1.253444878, i.e. higher return flows but higher the risk is associated with the stock.
?
The cumulative value of beta is found to be 0.318491643,which implies that the cumulative value of beta score from the period 2004-2010 is less than 1.0 , which keeps it under category of Defensive Stock which means less returns but the risk associated with it is also less.
HZL -0.2 0 0.1 0.2 0.00586923 0.001926599 0.003029824 0.003706916 0.044137723 -0.058989198 -0.006428342 0.00339412 -0.1 -0.25 0.05 0.15 0.25 -0.15 -0.05
SENSEX
0.005080944
0.006096158 0.003875282 -0.000903032 0.005482115 0.00491654 0.003309674 0.014400627 0.002248616
Return (HZL)
Return (BSE)
Bibliography
1. www.investopedia.com 2. www.investorword.com 3. www.vedantaresources.com 4.http://www.hzlindia.com/ 5. www.finance.yahoo.com 6. www.moneycontrol.com 7. www.livemint.com 8. www.bseindia.com
doc_383140491.docx
FM BETA CALCULATION OF HINDUSTAN ZINC
INTRODUCTION
Vedanta Resources1 is a London-based FTSE 100 metals and mining group, diversified in operations and inclusive in scope. They currently operate in India, Zambia and Australia, with extensive interests in aluminium, copper, zinc and lead. They employ over 30,000 people in their various locations. In December 2003, they proudly became the first Indian company to be listed on the London Stock Exchange. They have undertaken several greenfield and brownfield expansion projects in a number of locations in order to achieve this goal. The capital expansions completed in the first phase involved fairly complex project technologies, and an investment of $2.2 billion. They completed these expansions in record time, at costs significantly lotheyr than international benchmarks, and now, the next phase of the expansion pipeline is currently underway
VEDANTA RESOURCES
Vedanta Resources plc
Vedanta Resources plc is a diversified metals and mining company with revenues in excess of US$6 billion. They are proud to be the first Indian manufacturing company to be listed on the London Stock Exchange.
1
www.vedantaresources.com
Their experienced workforce of over 30,000 people is distributed among their operating locations in India, Zambia and Australia. The principal members of their consolidated group of companies are as follows:
COPPER BUSINESS
Sterlite Industries (India) Ltd. Sterlite is headquartered in Mumbai. Sterlite has been a public listed company in India since 1988, and its equity shares are listed and traded on the NSE and the BSE, and are also listed and traded on the NYSE in the form of ADSs. Vedanta owns 53.9% of Sterlite and have management control of the company. Konkola Copper Mines. They own 79.4% of KCM’s share capital and have management control of the company. KCM’s other shareholder is ZCCM Investment Holdings Plc. The Government of Zambia has a controlling stake in ZCCM Investment Holdings Plc.
Copper Mines of Tasmania Pty Ltd. CMT is headquartered in Queenstown, Tasmania. Sterlite owns 100.0% of CMT and has management control of the company.
ZINC BUSINESS
Hindustan Zinc Limited. HZL is headquartered in Udaipur in the State of Rajasthan. HZL’s equity shares are listed and traded on the NSE and BSE. Sterlite owns 64.9% of the share capital in HZL and has management control. Sterlite has a call option to acquire the Government of India’s remaining ownership interest.
ALUMINIUM BUSINESS
Bharat Aluminium Company Ltd. BALCO is headquartered at Korba in the State of Chhattisgarh. Sterlite owns 51.0% of the share capital of BALCO and has management control of the company. The Government of India owns the remaining 49.0%. Sterlite exercised an option to acquire the Government of India’s remaining ownership interest in BALCO in March 2004.
Vedanta Aluminium Ltd. Vedanta Aluminium is headquartered in Lanjigarh, State of Orissa. Vedanta owns 70.5% of the share capital of Vedanta Aluminium and Sterlite owns the remaining 29.5% share capital of Vedanta Aluminium.
IRON ORE BUSINESS
Sesa Goa Limited. Sesa Goa is headquartered in Panaji, India, and its equity shares are listed and traded on the NSE and BSE. They own 57.1% of Sesa and have management control of the company.
COMMERCIAL POTHEYR GENERATION BUSINESS
Sterlite Energy Limited. Sterlite Energy is headquartered in Mumbai. Sterlite owns 100.0% of Sterlite Energy and has management control of the company. Madras Aluminium Company Ltd. MALCO is headquartered in Mettur, India. MALCO’s equity shares are listed and traded on the NSE and BSE. They own 93.9% of MALCO’s share capital and have management control of the company.
Operations ? COPPER
Their copper business is comprised of operations in India, Zambia and Australia. Their Indian copper business is principally one of custom smelting and is operated by Sterlite, while their Zambian copper business is owned and operated by KCM. They own 54% of the share capital of Sterlite and 79.4% of the share capital of KCM. Sterlite was India’s largest metals and mining company based on net sales in fiscal 2008. In addition, they own the Mt. Lyell copper mine in Tasmania, Australia, which provides a small percentage of Sterlite’s copper concentrate requirements. Their Zambian operations are comprised of ftheir mines, one at Konkola, two at Nchanga and one at Nampundthey, a tailings leach plant at Nchanga and a smelter at Nkana. Their copper cathode production increased from 436,000 tonnes in fiscal 2006 to 507,000 tonnes in fiscal 2010. The production increases, together with higher copper market prices, drove revenue of their copper business from $2,241.3 million in fiscal 2006 to $3,812.2.0 million in fiscal 2010. The mid-shaft loading station at the Konkola Deep Mine Project was commissioned in March 2010 as scheduled. Construction work on the bottom shaft sinking is progressing theyll for completion by end 2011. The cost of KDMP project has been revised upward from US$674 million to US$973 million due to theyak ground conditions, increase in scope post detail engineering and consequent extra time required, and commodity price increase.
? ZINC
Their fully integrated zinc business is owned and operated by HZL, India’s leading zinc producer with a 79.7% market share by volume of the Indian zinc market in fiscal 2008, according to the Indian Lead Zinc Development Association. HZL is the world's largest
integrated zinc lead producer with current capacity of 964,000 tonnes. Sterlite owns 64.9% of the share capital of HZL. HZL’s operations include three lead-zinc mines, three hydrometallurgical zinc smelters, one lead smelter and one lead-zinc smelter in Norththeyst India and one hydrometallurgical zinc smelter in Southeast India. HZL’s zinc production increased from 284,000 tonnes in fiscal 2006 to 578,000 tonnes in fiscal 2010, representing a CAGR of 19.4%. The production increases, together with higher zinc market prices, drove revenue of their zinc business from $875.5 million in fiscal 2006 to $1,651.7 million in fiscal 2010, representing a CAGR of 17.2%. HZL achieved the 1mtpa zinc-lead capacity through the recent commissioning of the 210,000 tonnes zinc smelter in Rajpura Dariba. The 100,000 tonnes lead smelter and the associated 160 MW captive potheyr plant is progressing theyll and on schedule for completion by Q2FY2011 HZL expects to increase its silver production from the current levels of approximately 100120 tonnes per year to a level of approximately 500 tonnes per year in the form of silver and silver bearing residue. A large part of this increase would be from the Sindesar Khurd mine where silver occurrences are approximately at levels of 200 ppm and from the use of appropriate technology in the new smelters. The ongoing exploration activities at HZL has yielded significant success with an increase of 33.7 million tonnes gross reserves and restheirces, prior to depletion of 7.1 mtpa in FY2010. Total reserves and restheirces as at 31 March 2010 stand at 298.6 million tonnes containing 34.1 million tonnes of zinc and lead metal and 832.7 million ounces of silver.
HINDUSTAN ZINC LTD.2
Overview of the Company
They are India's largest and world's second largest integrated producer of zinc & lead, with a global share of approximately 6.0% in zinc. They are one of the lotheyst cost producers in the world and are theyll placed to serve the growing demand of Asian countries. Hindustan Zinc is a subsidiary of the NYSE listed - Sterlite Industries (India) Limited (NYSE: SLT) and London listed FTSE 100 diversified metals and mining major - Vedanta Resourrces plc. Their core business comprises of mining and smelting of zinc and lead along with captive pothey generation. They have their mines and their smelting operations: mines are situated at Rampura Agucha (largest zinc producing mine in the world), Sindesar Khurd, Rajpura , Dariba and Zawar in the State of Rajasthan; while the smelters are located at Chanderiya, Debari and Dariba in the State of Rajasthan and Vizag in the State of Andhra Pradesh. In March 2010, they have successfully commissioned their 210 ktpa Hydro Zinc Smelter at Dariba Smelting Complex and 1 mtpa concentrator at Rampura Agucha, in the state of Rajasthan. Their current metal production capacity is 964,000 tonnes per annum (879,000 tonnes of zinc and 85,000 tonnes of lead). The ore production capacity stands at 8.60 million tonnes per annum. They also own 314 MW of coal based thermal captive potheyr plants in Rajasthan to support their metallurgical operations. As a green energy initiative, they also have 123.2 MW of wind energy in Gujarat and Karnataka, which is sold to the respective State grids. Hindustan Zinc Limited (HZL) is an integrated mining and resources producer of zinc, lead, and silver. It is a subsidiary of Vedanta Resources PLC and is the world’s largest fully integrated Zinc producing company, with about 90% production share and around 80% market share in domestic market. It is also India’s leading Lead producer. • One of the world’s lowest cost producers of Zinc and Lead owing to its captive mines and power plants.
2
www.hzlindia.com www.vedantaresources.com
• The company has exclusive mining rights and continuously increasing capacity, making it the only choice for its customer. This, combined with a significant cost advantage, strong sales realization helps HZL post robust growth in revenues. • HZL’s captive mines of zinc and lead ore are located in Rajasthan; with total reserves of 298.6 MT. The average3 Zinc content across mines stands at ~ 8.7%, one of the highest globally. • HZL is focusing aggressively on increasing its silver production. It expects to become Asia’s largest and world’s sixth largest silver-producing company by 2013 • HZL is a debt free company and at the end of FY10 had a net cash balance of Rs. 118bn. Based on the consolidated FY12 EV/EBIDTA multiple of 7.5, the fair value for the company works out to Rs. 1450
3
http://www.fullertonsecurities.co.in/equity/markets/rsch_reports/1_0_15102010Fullerton Hindustan Zinc%20Ltd%2015th%20Oct%202010.pdf
Measuring Market Risk
Changes in interest rates, government spending, monetary policy, oil prices, foreign exchange rates, and other macroeconomic events affect almost all companies and the returns on almost all stocks. We can therefore assess the impact of “macro” news by tracking the rate of return on a market portfolio of all securities. If the market is up on a particular day, then the net impact of macroeconomic changes must be positive. We know the performance of the market reflects only macro events, because firm-specific events—that is, unique risks—average out when we look at the combined performance of thousands of companies and securities. In principle the market portfolio should contain all assets in the world economy— not just stocks, but bonds, foreign securities, real estate, and so on. In practice, however, financial analysts make do with indexes of the stock market, usually the Standard & Poor’s Composite Index (the S&P 500). The task here is to define and measure the risk of individual common stocks. We can probably see where we are headed. Risk depends on exposure to macroeconomic events and can be measured as the sensitivity of a stock’s returns to fluctuations in returns on the market portfolio. This sensitivity is called the stock’s beta. Beta is often written as the Greek letter ?.
Capital Asset Pricing Model (CAPM)
What Does Capital Asset Pricing Model - CAPM 4mean? A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. Expected return on the share E(Rjt) = a constant Rt(1 – ?j) + expected return on market portfolio E(R?t) x beta of the share ?j The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period
4
www.investopedia.com www.wikinvest.com
of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk. This is calculated by taking a risk measure (beta) that compares the returns of the asset to the market over a period of time and to the market premium (Rm-rf). The CAPM says that the expected return of a security or a portfolio equals the rate on a riskfree security plus a risk premium. If this expected return does not meet or beat the required return, then the investment should not be undertaken. The security market line plots the results of the CAPM for all different risks (betas).
Calculating Beta:5
The most important component in calculating the required return to shareholder (from the CAPM) is the company’s beta. The CAPM can be succinctly stated as:
The original model was conceived of theoretically, and was expected to be forward looking. Careful reading of Sharpe’s original work show that the market assesses systematic risk looking at expected future covariance of the company’s returns with that of the overall market. It is assumed that these covariances are unbiased and efficient estimates of the observed relationships ex post facto. Traditionally the CAPM relationship is estimated using simple regression on historical outcomes, where ks is the y variable, and kM-kRF (or the market risk premium) is the only x variable. Care must be taken that the returns plugged into the regression are all for the same period. Calculated stock returns should be annualized if the risk-free rate is an annual rate. The market risk premium is merely the difference between the return to the market portfolio and the risk-free rate. Academics typically use a value weighted portfolio to proxy for the
5
http://www2.cob.ilstu.edu/kjbaue2/fil341/SV.pdf www.investopedia.com
market portfolio, and a one-month Treasury
Bill rate to proxy for the risk-free rate.
Practitioners can use equally weighted portfolios (but not all do) and tend to use longer term Treasury bonds for the risk-free rate. The biggest contention between the two is over the riskfree rate proxy. Academics want a rate that is free from all risk, including interest rate risk. Practitioners want a default-risk-free instrument with a more comparable maturity to stock.
What Does Beta Mean?6
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns..
Expected return = risk-free rate + risk premium
?
Beta is a historical measurement of the risk an investor is exposed to by holding a
particular stock or portfolio as compared to the market as a whole. Aggressive stocks have higher beta(?), betas greater than 1.0, meaning that their returns tend to respond more than one for one to changers in the return of the overall market.
?
?
Defensive stocks have low beta , betas lower than 1.0, The returns of these stocks vary less than one-for-one with market returns. The average beta of all stocks is—no surprises here—1.0 exactly.
6
www.investopedia.com www.investorwords.com
Applications of Beta 7
Beta is a commonly used tool for evaluating the performance of a fund manager. Beta is used in contrast with Alpha to denote which portion of the fund's returns are a result of simply riding swings in the overall market, and which portion of the funds returns are a result of truly outperforming the market in the long term. For example, it is relatively easy for a fund manager to create a fund that would go up twice as much as the S&P 500 when the S&P rose in value, but go down twice as much as the S&P when the S&P's price fell - but such a fund would be considered to have pure Beta, and no alpha. A fund manager who is producing Alpha would have a fund that outperformed the S&P 500 in both good times and bad.
7
www.wikinvest.com
Analysis of Beta calculated of HINDUSTAN ZINC LTD.
The different values found for the year from 2004-2010 are as follows Year Value of Beta BETA 2004-10 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 0.44341417 -0.134622155 0.015060877 0.475006739 0.259225466 1.253444878
0.318491643
Interpretation of Data( ? value) ?
The beta for the year 2004-05 is found to be 0.44341417, it means its a defensive stock having value < 1.0 , which implies that less risk is associated with the stock of the company and thus low returns.
? ?
In the year 2005-06, the value of beta is found to be
-0.134622155, which states 0.015060877,
it means its a
a negative co relation between risk associated with the value of shares and sensex. In the year 2006-07, the value of beta is found to
defensive stock having value < 1.0 , which implies that less risk is associated with the stock of the company and thus low returns.
?
In the year 2007-08, the value of beta is found to be
0.475006739, it means its a
defensive stock having value < 1.0 , which implies that less risk is associated with the stock of the company and thus low returns.
?
In the year 2008-09, the value of beta is found to be
0.259225466, it also means
its a defensive stock having value < 1.0 , which implies that less risk is associated with the stock of the company and thus low returns.
?
But contrary to the above values of beta , in the year 2009-10, the value of beta is found to be greater than 1 i.e. 1.253444878, i.e. higher return flows but higher the risk is associated with the stock.
?
The cumulative value of beta is found to be 0.318491643,which implies that the cumulative value of beta score from the period 2004-2010 is less than 1.0 , which keeps it under category of Defensive Stock which means less returns but the risk associated with it is also less.
HZL -0.2 0 0.1 0.2 0.00586923 0.001926599 0.003029824 0.003706916 0.044137723 -0.058989198 -0.006428342 0.00339412 -0.1 -0.25 0.05 0.15 0.25 -0.15 -0.05
SENSEX
0.005080944
0.006096158 0.003875282 -0.000903032 0.005482115 0.00491654 0.003309674 0.014400627 0.002248616
Return (HZL)
Return (BSE)
Bibliography
1. www.investopedia.com 2. www.investorword.com 3. www.vedantaresources.com 4.http://www.hzlindia.com/ 5. www.finance.yahoo.com 6. www.moneycontrol.com 7. www.livemint.com 8. www.bseindia.com
doc_383140491.docx